A Good Decade For The Focus List

8/19/2013


The Forecasts' Focus List, our best ideas for 12-month returns, is on pace to top the S&P 500 Index for the seventh year in the past 10.


FOCUS LIST OUTPERFORMS

Year
Focus
List
(%)
S&P
500
Index
(%)
Focus
List
Relative
To S&P
500
(%)
2013 *
23.8
18.8
5.1
2012
14.2
13.4
0.8
2011
(4.8)
0.0
(4.8)
2010
19.5
12.8
6.8
2009
40.0
23.5
16.6
2008
(48.8)
(38.5)
(10.3)
2007
22.8
3.5
19.3
2006
12.9
13.6
(0.8)
2005
8.1
3.0
5.1
2004
17.5
9.0
8.5
2003
20.2
26.4
(6.2)
Since 2003 *
144.2
92.6
51.6

We prefer to limit the Focus List to our 12 to 18 favorite year-ahead picks. The list averaged 15 components over the past decade, though it has held as many as 20 stocks and as few as 10.

While we look for opportunities everywhere in the market, we tend to fish some spots with more frequency. Four sectors — consumer discretionary, financials, health care, and technology — have maintained a major presence.

In the past decade, stocks remained on the Focus List for an average of 14 months. Energy and financial stocks tended to have longer durations (at least 17 months), while turnover for health-care stocks was more rapid (11 months). Only two telecommunication services have graced the Focus List, and just one utilities name — an exchange-traded fund at that: iShares Dow Jones Utility Index ($97; IDU).

Today, the composition skews more heavily toward technology, consumer discretionary, and consumer staples than historical norms. Financials are lighter, and four sectors are not represented at all.

Quadrix helps dictate the Focus List's composition. Stocks scoring in the top one-fifth of the S&P 500 Index based on Overall score have outperformed the median stock in the index by an average of 1.9% in 12-month periods since 1994, and by 0.8% over the past decade.

With that in mind, we seek out ponds well stocked with potential candidates. A sector's representation on the Focus List tends to rise and fall along with the percentage of its stocks scoring above 80 for Overall. The breadth of stocks in a sector also matters. Keep in mind that the S&P 500 Index contains just six telecom stocks, while 83 hail from the consumer-discretionary sector. The more high-scoring stocks in a sector, the better our chance of finding ones we like enough to add to the list.

Below, we highlight one top pick from each of the Focus List's most important sectors over the last 10 years.

Cognizant Technology Solutions ($73; CTSH), a provider of outsourcing and technology services, has delivered double-digit sales growth in 45 consecutive quarters, a trend expected to continue through at least the end of next year. The consensus now projects 19% sales growth in both of the last two quarters of 2013.

Business in Europe has begun to show strong growth, as clients there become more willing to use Cognizant's offshore model. Cognizant continues to see a balanced recovery in the U.S. Management also says its business is not being affected by uncertainty regarding immigration reform, which weighed on the shares earlier this year. Cognizant is a Focus List Buy and a Long-Term Buy.


Foot Locker ($35; FL) shares slumped at least 5% on each of the retailer's past two quarterly reports. Since its last report, in late May, the stock has dipped 2%, while the S&P 500 has risen 3%. We gave Foot Locker a reprieve earlier this year, making the upcoming earnings report, scheduled for Aug. 23, all the more important. The retailer appears to be adding to its 20% share of the U.S. sneaker market, helped by a roster of newly remodeled stores. Consensus estimates for the July quarter have held steady, projecting earnings of $0.48 per share, up 26%, on revenue of $1.46 billion, up 7%.

The stock's P/E ratio is just 14 times trailing earnings, compared to its five-year average of 22 and the median of 16 for S&P 1500 Index apparel retailers. Should Foot Locker meet the consensus profit estimate of $2.81 per share for fiscal 2014 ending January, which implies 10% growth, and its P/E ratio remain at the current level, shares would reach $40 by early next year. Foot Locker remains a Focus List Buy and a Long-Term Buy.


A new chapter in J.P. Morgan Chase's ($54; JPM) legal story opened after the U.S. said it launched a criminal investigation into the sale of mortgage-backed securities (MBS) from 2005 to 2007. The threat of outsized penalties is nothing new, though criminal investigations are rare in these cases. J.P. Morgan paid at least $8.5 billion in fines from 2009 to 2012, roughly 12% of its net income, estimates one analyst. Last month it agreed to pay $410 million to settle claims brought against its commodities business. In addition, two regulators have threatened to fine the bank over its debt-collection practices.

J.P. Morgan shares already reflect a hefty dose of risk, trading at 10 times trailing earnings, 36% below their five-year average. From 2003 to 2008, J.P. Morgan's trailing P/E ratio averaged a 21% discount to the average S&P 500 financial stock. That discount is now 47%, in line with the average from 2010 through the present. The stock scores above 60 in all six Quadrix categories, contributing to an Overall rank of 99. It also earns maximum scores of 100 for both sector-specific ranks. J.P. Morgan Chase, yielding 2.8%, is a Focus List Buy and a Long-Term Buy.


Mylan ($37; MYL) shares have rallied 35% in 2013, ahead of the 27% gain for S&P 500 Health Care Sector Index and the 19% advance for the broader S&P 500. Earlier this month, the company impressed investors with 2014 guidance that calls for per-share profits to surge roughly 19% on 12% revenue growth. Mylan, one of the world's largest makers of generic drugs, expects to post annualized growth of 13% for revenue and 16% for earnings per share through 2018.

Mylan enjoys strong operating momentum, with cash provided by operations rising 34% in the past year and free cash flow 39%. Operating profit margins also expanded in the first half of 2013. The stock, still reasonably valued at less than 12 times expected 2014 earnings, is a Focus List Buy and a Long-Term Buy.

OUR FOCUS LIST
Date
Added
To List
Price
Chg.
Since
Added
To List
(%)
S&P
500
Price
Chg.
Since
Added
To List
(%)
YTD
Total
Return
(%)
-- EPS Growth --
-- P/E Ratio --
---- Quadrix Scores ----
Months
Overall
Above
80 In
Past 24
Months
Company
(Price; Ticker)
Past 12
Months
(%)
Est.
Next 12
Months
(%)
Current
5-Yr.
Avg.
Momen-
tum
Value
Overall
Sector
Alliance Data Sys.
($208; ADS)
5/26/11
126
28
44
8
15
23
18
71
44
84
15
Technology
Cisco Systems
($26; CSCO)
6/20/13
8
7
36
11
4
13
15
65
76
92
21
Technology
Cognizant Tech.
($73; CTSH)
8/1/13
0
(1)
(1)
17
19
20
23
92
75
98
19
Technology
CVS Caremark
($60; CVS)
10/4/12
23
16
26
20
18
17
15
61
73
87
20
Staples
DirecTV
($62; DTV)
10/9/08
208
86
23
24
10
13
17
71
94
98
24
Discretionary
Express Scripts
($66; ESRX)
5/16/13
8
3
21
6
13
17
22
71
83
92
12
Health Care
Foot Locker
($35; FL)
9/13/12
(6)
16
11
22
13
14
22
80
89
96
24
Discretionary
Helmerich & Payne
($67; HP)
1/10/13
14
15
22
24
0
12
12
85
89
99
24
Energy
J.P. Morgan Chase
($54; JPM)
2/14/13
10
11
26
32
0
10
15
93
94
99
14
Financials
Kroger ($39; KR)
5/16/13
12
3
52
25
5
15
12
88
78
97
13
Staples
Lear ($73; LEA)
8/1/13
5
(1)
56
13
4
13
8
96
83
99
15
Discretionary
Magna Int'l
($82; MGA)
1/31/13
56
13
65
8
3
14
15
79
74
96
18
Discretionary
Mylan ($37; MYL)
12/6/12
36
20
35
25
10
14
19
81
63
93
14
Health Care
Qualcomm
($67; QCOM)
2/14/13
3
11
10
24
10
16
22
97
77
97
18
Technology
Wells Fargo
($43; WFC)
6/14/12
35
27
30
18
5
12
16
80
85
96
21
Financials
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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